Gas price reflects other costs

Re: Oil companies gouge customers, Letters, June 16.

I can certainly understand the frustration of the writer and many others.

I’m sure that we always seem to be getting gouged at the pumps. I’m not saying it cannot happen, but as a past commodity trader who still likes to watch these things, I believe this is not the case.

Unfortunately, the crude oil prices that we see quoted every night on the news does not always correlate with gas prices as closely as we would like. Ultimately, in the end, the price of a barrel of oil will determine how gas is priced, but there are many other considerations.

First, it usually takes about six weeks or more for oil-price changes to work their way through the distribution system to the gas pump. As crude oil prices have fallen about $20 per barrel in a short period of time, we have not yet seen the benefit.

Second, there are two types of crude oil traded in the international markets. The oil prices we hear in the media generally refers to West Texas Intermediate crude. This is “price settled” at Cushing, Okla., and traded on the New York Mercantile Exchange.

This well known benchmark has lost its role and I would suggest has been replaced by Brent Crude. The world’s largest producer, Saudi Arabia, stopped using WTI as a benchmark in 2009. Brent Crude seems to be the real international benchmark as two-thirds of the oil consumed in North America is Brent, and two-thirds of international crude is priced to Brent.

The historical spread between Brent and WTI is typically a $1 to $3 premium, but over the last year this spread rose sharply to almost $20, largely in part to strong imports from China and speculative buying on Middle East concerns. Brent prices have come down along with WTI, but still trades at about a $13 premium.

Last of all, refining production has different pricing mechanisms as we move from east to west. The West Coast switches to a more expensive fuel blend in summer to fight pollution, but a fire at the BP refinery in Blaine, Wash. and maintenance work at several California refineries has also led to a squeeze in wholesale gas prices.

A Department of Energy report showed gasoline supplies in California are down more than 20 per cent from a year ago and haven’t been this low since May of 1992. Other considerations would be refinery margins and currency fluctuations. Just be glad our Canadian dollar is not at 80 cents instead of close to par, then we would really be complaining.

Paul McDowell